The Series LLC, a Closer Look

There is a lot of discussion about forming a series LLC instead of multiple LLCs to help save on filing costs. A series LLC is a form of a LLC that provides liability protection across multiple “series” each of which is THEORETICALLY protected from liabilities arising from other series or units. Some have described this structure as a master LLC that has separate divisions (another way to look at it). Series LLCs are now permitted in 8 states, Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas and Utah.

Each series or unit also called a sub-LLC will have to create a separate Series Agreement. Each sub-LLC will have its own asset name, bank account and a separate EIN (Federal Tax ID) number. While the Operating Agreement will be amended as series are added or deleted, the Certificate of Formation (also called Articled of Organization) filed with the state does not require amendment.

The Series LLC members must sign an Addendum to the Operating Agreement and then separate accounts must be established and records maintained for the new cell or unit that is added.

Concerns and Issues with a Series LLC

Currently, governing bodies have not resolved the problems surrounding tax and creditor issues related to the Series LLC.

There is some conflict between the Federal Bankruptcy Code and the State Series LLC law. Some current Series LLC owners have expressed concerns about their inability to file one tax return for all of the sub-LLCs. Many attorneys are reviewing the tax laws to determine the best way to resolve tax issues. The resolution will also determine whether or not they will endorse the Series LLC nationwide. However, a pending IRS regulation may solve at least the federal taxation questions related to Series LLC. It is expected to be enacted in the near future.

CAUTION: We do NOT currently recommend the series LLC if you are planning to invest in real estate in California.

California’s Franchise Tax Board says that if the LLC registers to do business in California each series or unit will be treated as a separate legal entity and subject to the $800 California Franchise Tax Fee. That means if you have a series LLC with 5 units would pay 5 x $800=$4,000.00 each year to the state of California.

A better approach if you are looking to invest in real estate in California is to have one LLC that will be formed in Nevada that will register to do business in California. Then there will only be ONE $800 fee per year.

Overall, separate LLCs are the safest and best approach when it comes to investing in real estate.